“Heads you win, tails you win” is one of the favorite sayings of the insurance salesman.

I’ve seen a lot of insurance products promoted this way, as is the case with indexed insurance, the popular product of today’s era. It is a complex insurance product, packaged in way that makes the policy owner believe they can’t lose. If the stock market goes up, they make money. If the stock market goes down, they stay even.

I wrote yesterday about how the insurance industry makes products that are designed to sell into whatever the masses are demanding. By definition, this is almost always the wrong move from an investment perspective. I also mentioned that indexed insurance could do poorly if the price of derivatives rises.

High dividend rates could hurt indexed insurance policies

Here is another wrinkle in indexed insurance. Their calculations for policy value growth are based on the price level of the index they are tracking. They don’t include dividends in the return. If we end up in an environment where a lot of the return from stocks comes from the dividend component, this would hurt indexed insurance policies.

How it plays out

I have written before about how the retirement of the baby boomers could cause P/E ratios to go down and dividend yields to go up. What if derivatives prices creep up while dividends simultaneously become a larger component of stock returns?

Over the next 20 years, it is likely these two events will occur. If they happen together and persist for a long time (which I suspect they will) this creates the perfect cocktail that will torpedo indexed insurance policies.